IMHO: What Lies Ahead
Here is a look at the trends that were on our mind this past year—and those just over the horizon.
Doctor Bill? Curing Health Care
What we said: It is still hard to believe that the Senate and House positions on any number of key issues can be reconciled—but then, there was a point in the summer of 2006 when many felt the same way about the Pension Protection Act. But if it does pass—or if it does not—it seems safe to say that the issue is not going away any time soon. What remains to be seen is if the “cure” is worse than what it aims to remedy.
Where we are: Given the legislative hurdles that the Patient Protection and Affordable Healthcare Act (PPACA) faced a year ago, it still seems amazing that the legislation passed. Of course, the dominant majorities in Congress that were necessary to carry that off are no more (some would argue in no small part because of their role in passing the legislation), legal challenges have been filed by roughly half the states, and the newly resurgent Republicans in Congress are threatening to “repeal and replace.”
What’s ahead: Common wisdom is that the legal challenges will fall short, and that President Obama’s certain veto of any attempt to repeal (much less replace) the legislation will keep those efforts at bay as well. Those in support of the legislation continue to believe that the American public will eventually warm to the idea (in fairness, many already do), while those opposed find vindication in the results of the recent mid-term elections. My guess is that we will still be talking about this a year from now—and that the issue will loom large in the 2012 election cycle.
Fee Fie? Revenue-Sharing Litigation
What we said: Barring a smoking gun discovery among the cases already filed, it seems likely that the laws—and disclosures—will change before the litigation has any real impact. On the other hand, it is entirely possible that the mere existence of that litigation—and the ever-present litigation threat—will serve to reform the system in a way, and on a schedule, that would not otherwise have been possible.
Where we are: No smoking gun yet, but four years in, a number of the cases have settled, another group has been dismissed and, by my count, only one has been fully adjudicated (and that in favor of the plaintiffs). The courts are split on the issues, and many have been willing to extend plan fiduciaries the benefit of the doubt, so long as participants had the ability to make their own investment choices. As litigation worries go, this brand drew the highest level of concern in PLANSPONSOR’s annual Defined Contribution Survey—but it wasn’t much. As for that much-anticipated “second generation” of lawsuits? Well, somewhat surprisingly, it has yet to materialize.
What’s ahead: This year the Form 5500 took a big first step in prompting a new level of fee disclosures, and the near-final proposed regulations on 408(b)2 should carry that one step further. The Labor Department continues to challenge the courts’ generous application of ERISA 404(c)’s shield and has gone so far as to make its point clearer on the application of 404(c) with the addition of language in the recently proposed participant fee-disclosure regulations. Many seem to think that more disclosure, and the more public disclosure in the form of Form 5500, will simply serve to provide the plaintiffs’ bar with fuel for the fire; while others believe that more (and more consistent) disclosure will make it easier for fiduciaries to know what they are paying and if it is reasonable. My guess is that both will turn out to be correct.
Auto-Premonition—Doing It for Participants
What we said: Automatic enrollment may have taken something of a “holiday,” but it seems unlikely to be over as a trend. Look for the pace to pick up again in 2010—and for the Obama Administration to turn its attention to the issue in the next year (or two).
Where we are: Well, in many respects, it was déjà vu all over again—with a sluggish economy doubtless contributing (no pun intended) to another flat year for automatic enrollment adoption rates. Still, while the overall adoption rate in PLANSPONSOR’s annual Defined Contribution Survey was slightly lower this year, there was a discernible uptick in adoption at the largest programs—even if small and micro plans showed no change at all. That said, the primary motivation this year, as it has been the past two, has been to be more proactive in helping workers save, and there’s every indication that it will remain so in the future.
What’s ahead: I’m sure plans will continue to adopt the design—for all the right reasons—but it is hard to see anything leading to any kind of major acceleration in the trend in the short term.
Default Lines—Targeting Target-Dates
What we said: We don’t know yet what regulators may try to do to help ensure that investors—particularly near-retirees—are not misled by the simplicity of a fund title and marketing pitch. Plan sponsors are on notice that there are differences here and, with luck, will continue to ask pointed questions. Because, after all, when you’re selling “you don’t have to worry about it,” somebody has to.
Where we are: Much of the “damage” from 2008 has been restored, providers have taken pains to ensure that buyers understand their underlying glide path assumptions (certainly those having to do with equity allocations at age 65), and regulatory bodies have taken some baby steps in helping individual investors better understand these offerings. All in all, the storm seems (for the most part) to have passed.
What’s ahead: More and better disclosures, a growing interest in offerings that take more into account than mere retirement date (including managed accounts), and more discussion around the importance of open architecture solutions and concerns about the (lack of) ERISA fiduciary status for the providers who bundle their own offerings together. But as for real change—failing another sharp stumble in the markets—most seem to be content with the way things are.
Next up: Pension Funding, Advice, and the Roth 401(k)